Getting cut to pieces

COMING OUT of a mining boom with a slowing but strong economy has put Australia in an enviable position following the global financial crisis. But both parties' obsession with getting the budget back into surplus has baffled economists and could lead to serious consequences for the ACT.

Cuts will result in job losses, no matter which side wins on September 7. But in a territory where 51 per cent of workers are paid by either the state or federal government, it will be felt more keenly in Canberra than across the rest of the nation.

The Coalition has committed to shedding 12,000 Australian Public Service jobs by imposing a hiring freeze if it gains office, while the Labor government's plan to spend $229 million less on wages and salaries in 2013-14 than it had allocated in its May budget translates to culling more than 4000 jobs over the next 11 months. On top of the wage cut, the Rudd government has committed to inflating its annual cut to agencies' operating budgets - known as the efficiency dividend - from 1.25 per cent to 2.25 per cent as of July 1 next year. The Community and Public Sector Union estimates that decision will result in the loss of another 5000 jobs.

These cuts come after job losses in 2012, with the Public Service Commission indicating that more than 2600 jobs were lost between June and December 2012. Some of the larger departments cut heavily, with Defence and Human Services each shedding up to 1000 jobs and the Australian Taxation Office cutting 420 positions.

Chief executive of the Canberra Business Council Chris Faulks says the impact on the ACT is being ignored. ''We have no marginal seats and the focus is on winning the election, so we aren't even on the radar,'' Ms Faulks says.

''Take a big accounting firm; 80 per cent of their work is from the federal government … either side, there are going to be job losses, and when jobs are insecure people stop buying.'' A structural change in retail habits from storefront to online means that many businesses are struggling.

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''Normally there is a 33-day campaign; with the announcement of the election in February, we've had six months of pseudo-electioneering. By the time we have the election it will be almost a year. The lack of consumer confidence has flowed from political instability and uncertainty over how many jobs will be cut.''

She says the federal government should work with local government to invest in and diversify the ACT's economy.

The reasons for the razor gangs have been questioned by two of Australia's leading economists.

The last pre-election economic and fiscal outlook, or PEFO, made no change to the government's recent budget forecasts apart from a slight improvement in the $4.2 billion surplus projected for 2016-17.

This financial year's budget deficit is still forecast at $30.1 billion. Last year Australia recorded a government debt to GDP ratio of 20.70 per cent of the gross domestic product. The higher the debt-to-GDP ratio, the harder it is for the country to repay its debt, and more likely the country may default on its debt obligations.

Professor James Morley from the Australian School of Business says the Reserve Bank has really done all it can by dropping interest rates and it is time for the parties to release their fiscal policies.

''Australia could easily sustain a debt to GDP ratio of 20 to 50 per cent. It's at about 20 per cent, so it's quite low … Australia could [run deficits] for decades without putting it close to the realm of countries like Greece, as an extreme example. But even the US has a higher GDP to debt ratio than Australia … It would take 30 to 50 years running these sorts of deficits to get up to the US level of debt to GDP ratio.''

He doubts either party will keep a promise to bring the budget back into surplus, with even shadow treasurer Joe Hockey admitting in June a Coalition government might have to deliver economic stimulus during a downturn.

''Getting elected, both parties will probably run deficits because the economy will be growing a little more slowly after the mining boom,'' Professor Morley says.

''Part of the boom wasn't just the sale of commodity but also investment in the mining sector in anticipation of sales over decades. They have come down from unsustainable levels that you wouldn't have expected. The investment stage can't continue - it was inevitable that part would end around now - so the bigger question is what kind of demand will there be for global commodities over the next few decades.''

He says any grandstanding by the parties that their policies would lead to lower interest rates were a lie. ''The difference between the two political parties' planned spending will have very minimal impact on the bond market [interest rates], or next to none … I don't think either party could say their plan was going to lead to lower interest rates because of having more sustainable spending plans,'' he says.

Emeritus economics professor from the University of Sydney Frank Stilwell says investment in industry would help the economy grow after the mining boom.

''The PEFO report is one of uncertainty, but on almost every page there is reference to uncertainty to the global outlook and how that's going to impact on Australia. Facing an uncertain future, we should have policies with shock absorbers that minimise that, rather than continue the current trajectory, which depends so heavily on mineral exports.''

Damage has been done to the manufacturing sector because high exchange rates made them uncompetitive internationally.

''It's hard to see where the new growth areas will come from. Some areas like sale of education services to international students have been buoyant, but the medium to long-term prospects aren't good because competitors are making a good product.''

He says there was an opportunity to grow the economy with strong industry policy, but neo-liberal ideology about free markets was too entrenched.

''Frankly, I'm not very optimistic about that, since both major parties in the past two decades have avoided industry policy in any systematic way. They should be talking about industry policy but they ain't.'' He blasted the parties' commitment to surplus as a quick race to the bottom.

''Sensible economic management means thinking long-term and strategically, as well as keeping short-term options open continuously. Commitments to have a budget surplus in year x are intrinsically stupid. Changing economic circumstances may make that undesirable or unwise. That was the whole lesson of Wayne Swan's stupid commitment to a surplus by a certain year. It's absolute folly, because neither party can with absolute insurance commit to running a surplus, and nor should they. Public debt is very low by international standards.''

He said debt should be shared between generations to pay for big infrastructure.

''It's a perfectly appropriate cyclical policy, it's traditional Keynesian theory, and it works to stop recession and unemployment.''